If you have real estate or are thinking of buying real estate then you should pay attention, because this can be the most important message you receive this year regarding your real estate and financial future.
The last five years have seen explosive growth in the real estate market and as a result many people believe that real estate is the safest investment you can make. Yes, that is not true anymore. Rising real estate prices have caused the real estate market to be at a price level never seen in history when adjusted for inflation! More and more people are worried about real estate bubbles, which means fewer real estate buyers are available. Fewer buyers means the price drops.
On May 4, 2018, Governor of the Federal Reserve Board stated that “Housing really peaked”. This follows the heels of new Fed Chair Ben Bernanke saying that he is concerned that “softening” the real estate market will hurt the economy. And former Fed Chair Alan Greenspan previously described the real estate market as foamy. All leading financial experts agree that there has been a decent decline in the market, so there is clearly a need to know the reasons behind this change.
3 of the 9 main reasons why the real estate bubble will break include:
- Interest rates rose – foreclosures rose 72%!
- The home buyer who is first priced out of the real estate market is the pyramid and its base collapses
- Market psychology has changed so that now people are afraid of bursting bubbles – real estate mania is over!
The first reason that the real estate bubble explodes is an increase in interest rates. Under Alan Greenspan, interest rates were at historic lows from June 2003 to June 2004. This low interest rate allowed people to buy homes that were more expensive than usual, but with the same monthly fees, basically creating “free money”. However, the time for low interest rates has ended because interest rates have increased and will continue to increase further. Interest rates must rise to fight inflation, partly because of the high prices of gasoline and food. Higher interest rates make owning a house more expensive, thereby reducing the value of existing homes.
Higher interest rates also affect people who buy adjustable mortgages (ARM). Customized mortgages have very
The foreclosure situation will only deteriorate because interest rates continue to increase and more customized mortgage payments are adjusted to higher interest rates and higher mortgage payments. Moody’s stated that 25% of all unpaid mortgages will experience a return on interest rates during 2018 and 2019. That is $ 2 trillion in US mortgage debt! When payments increase, it will become very popular in the wallet. A study conducted by one of the largest insurance companies in the country concluded that 1.4 million households will face a leap of payments of 50% or more after the
The second reason that the real estate bubble explodes is that new home buyers can no longer buy houses because of high prices and higher interest rates. The real estate market is basically a pyramid scheme and as long as the number of buyers grows everything is fine. When a home is bought by a first-time home buyer at the bottom of the pyramid, a new $ 100,000.00 house rises to a $ 1,000,000.00 seller and home buyer because people sell one house and buy a more expensive house. This double-edged sword with high real estate prices and higher interest rates has left many new buyers out of the market, and now we are beginning to feel the effect on the real estate market as a whole. Sales are slowing and inventory of available homes for sale is increasing rapidly. The latest report on the housing market showed new home sales fell 10.5% for February 2018. This was the biggest one-month decline in nine years.
The third reason that the real estate bubble exploded was because the psychology of the real estate market had changed. Over the past five years the real estate market has increased dramatically and if you buy real estate you are most likely making money. This positive return for many investors triggered a higher market because more people saw this and decided to invest in real estate before they ‘missed’.
The psychology of each bubble market, whether we talk about the stock market or the real estate market is known as the ‘herd mentality’, where everyone follows the herd. This herd mentality is at the heart of every bubble and has occurred several times in the past including during the US stock market bubble in the late 1990s, Japanese real estate bubbles in the 1980s, and even as far as US railroad bubbles. from the 1870s. The herd mentality has completely taken over the real estate market to date.
Bubbles continue to rise as long as there are “bigger fools” to buy at a higher price. Because the fewer “bigger fools” are available or want to buy a house, mania disappears. When hysteria passed, the excess inventory built during the boom caused prices to plummet. This applies to the three historical bubbles mentioned above and many other historical examples. Also important to note is that when these three historic bubbles exploded, the US was thrown into recession.
With the changing mindset associated with the real estate market, investors and speculators are increasingly afraid that they will be left to hold real estate that will lose money. As a result, they not only bought less real estate, but they also sold their investment properties simultaneously. This resulted in a large number of homes available for sale on the market at the same time recording the construction of new homes flooding the market. These two increasing supply forces, the increasing supply of existing homes for sale coupled with the increasing supply of new homes for sale will further exacerbate the problem and reduce all real estate values.
A recent survey showed that 7 out of 10 people thought the real estate bubble would explode before April 2019. Changes in market psychology from ‘having to have real estate at any cost’ became a healthy concern that overpriced real estate led to finally a boom real estate market.
Exploding aftershocks will be very large and will greatly affect the global economy. Billionaire investor George Soros said that in 2019 the US would experience a recession and I agreed with him. I think we will be in a recession because when the real estate bubble explode, jobs will disappear, Americans will no longer be able to cash money from their homes, and the whole economy will slow down dramatically leading to recession.
In conclusion, three reasons for exploding the real estate bubble are higher interest rates; first time buyers are given prices out of the market; and the psychology of the real estate market is changing. An eBook recently published “How To Become Prosperous In A Changing Real Estate Market. Protect Yourself From Bubbles Now!” discuss these items in more detail.